When an AD shock raises equilibrium output and actual output exceeds potential output, there is ____
Output gap and the rate of wage increase and price inflation will tend to ____.

Question

Quizplus · Accepted Answer

When an aggregate demand (AD) shock raises equilibrium output and actual output exceeds potential output, it creates an inflationary gap. In this scenario, the economy is overheating, leading to increased demand for goods and labor. This increased demand typically results in higher wages and prices, causing the rate of wage increase and price inflation to tend to increase.

When an AD Shock Raises Equilibrium Output and Actual Output